The Supreme Court recently announced it will hear a challenge to the constitutionality of the Consumer Financial Protection Bureau (CFPB) sometime next year – a move that could affect the agency’s ongoing enforcement activity, future rulemaking process and leadership.
“The debate around the CFPB’s constitutionality has been going on since the agency first opened its doors in 2011,” said Tom Cronin, Managing Director at The Collingwood Group, a SitusAMC company. “This new case could have significant outcomes on future mortgage regulation.”
The case, CFPB v. Seila Law LLC, has been making its way through the district and appeals courts, finally resulting in a petition for a writ of certiorari with the Supreme Court in July.
The lawsuit alleges the CFPB’s single-director structure and independence violate the Constitution’s separation of powers. The Supreme Court has asked parties to the lawsuit to specifically address the constitutionality of the limitations set around the President’s ability to fire the CFPB Director – currently restricted to for-cause reasons, including “inefficiency, neglect of duty, or malfeasance in office.”
In an earlier lawsuit between PHH and the CFPB, a similar challenge to the constitutionality of the agency’s governance structure was ultimately inconclusive as the case was dismissed in 2018.
Opponents of the CFPB’s governance structure have argued in favor of creating a bipartisan Senate-confirmed commission to head the agency, similar to the Federal Reserve Board or the Federal Deposit Insurance Corporation (FDIC).
Under the current administration, the Department of Justice (DOJ) and CFPB Director Kathy Kraninger support the Supreme Court challenge.
While it is unclear how the political debate and Supreme Court case will play out over the next couple of months, “you can bet the entire mortgage industry and larger consumer financial services sector is following this case,” said Cronin.
The DOJ and CFPB’s agreement that the agency’s leadership and independence are unconstitutional, in tandem with the pending Supreme Court case, could impact how companies view enforcement activity.
“If the director structure is ruled unconstitutional, we can expect to see changes in the CFPB’s rulemaking process,” said Cronin. “With, for example, less independent authority or a bipartisan commission governing structure, the CFPB’s regulatory and supervisory initiatives are likely to take longer to implement and reflect a more politically balanced point of view.”
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